India’s foreign exchange reserves have swelled in recent months to a near record high. Forex reserves rose to $317.8 billion on July 18 from a low of $275 billion in August 2013, but the country is nowhere near the comfort level of February 2008 prior to the global meltdown when it was in a position to finance imports of about 15 months compared with just over eight months at present.
However, there is no unanimity on how much forex reserves will be enough. This is partly because sufficient import cover may not necessarily mean adequate foreign exchange reserves, which should also protect the country’s currency.
There have been instances where the currencies of some countries have fallen prey to speculative attacks despite a strong import cover. Take the case of Brazil, which has close to 16 to 17 months’ import cover and has more than twice India’s foreign direct investment. Yet, its currency is vulnerable to speculation as capital flows into the country comprise more of short-term debt flows.
